Real Japanese Government Bond Yields Turn Negative

When it comes to investing in bonds, it’s almost a cardinal rule that if you want to make money you should be extremely wary about buying debt that looks like it’s not going to keep up with the pace of inflation.

Of course that hasn’t been much of a problem in Japan’s sovereign debt market, given that prices in the world’s third-largest economy have been falling for the better part of 15 years.

But now that the government and Bank of Japan have pulled out all the stops to end deflation, Japanese government bonds have started giving investors negative returns after being adjusted for inflation. The nationwide core consumer price index rose 0.8% on year in August, while the yield on the 10-year JGB has been well below that level for more than two months.

While price increases outperforming returns could just be a by-product of the government’s stated mission of making JGBs as unattractive as possible so that investors switch to riskier assets, some traders note that no one’s rushing to get rid of their JGB holdings.

JGB yields, which fall as demand strengthens, are hovering near five-month lows.

“It just goes to show that JGB investors still aren’t expecting price rises to pick up that much,” said Tomohiro Miyasaka, strategist at Credit Suisse.

According to a survey of 154 bond investors by data provider QUICK Corp. released last week, the average prediction for the price of core goods and services in two years was 1.0%. That would keep real rates in negative territory if they stayed where they are, but it’s also far away from the 2% rise in prices the Bank of Japan wants to see.

Dealers also say that the core CPI reading – which excludes volatile prices of fresh food – is distorted by higher energy and import prices. Core core CPI, which looks at everything except food and energy, fell 0.1% on year in August, meaning real rates are still positive by that metric.

Other technical factors don’t make negative real interest rates such a problem for some of the biggest holders of JGBs, such as banks.

Noriatsu Tanji, bond strategist at Barclays Securities Japan, explained that negative real rates might not lead to a drop in profits for lenders because they would be negative for both their assets, including bond holdings, and liabilities, such as deposits.

That would mean even though the bank might be losing out with negative returns on their bond holdings, negative real interest rates on deposits mean depositors are essentially paying them to keep money in the bank.

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